China further opens up financial sector · offices. The data also show that about 10% of the total securities firms in China were joint ventures, and nearly one-third of property

China further opens up financial sectorA compilation of EY POVs (I)

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IndexChapter I: Improve the capacity to further develop capital markets

Chapter II: Interpretation to the Implementation Rules on Administrative Licensing for Foreign Banks

Chapter III: Interpretation to the Measures for the Administration of Foreign-funded Securities

Chapter IV: Interpreting the CBIRC’s Initiative to Expedite the Market Opening-up for the Banking and Insurance Industries

Chapter V: Opportunities and challenges for overseas companies navigating China's Asset Management Industry

Chapter VI: What EY can do for you

Appendix I: Measures to further open op the financial sector announced at the Boao Forum for Asia (BFA) 2018

Appendix II: Notice on Further Relaxing Market Access for Foreign-funded Banks

Appendix III: Notice on Expanding the Business Scope of Foreign-funded Insurance Brokerage Companies

Appendix IV: Summary of the financial opening-up timetable

Appendix V: List of joint-venture fund management companies

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ForewordSince China’s accession to the World Trade Organization (WTO) in 2001, the country

has gradually relaxed restrictions on foreign financial institutions (FIs), including in

relation to their structure, as well as business location and scope. The new initiatives

recently launched are proof of China’s policy commitment to further opening up,

relaxing its restrictions and creating a fair and transparent environment that will help

streamline the administration of foreign FIs and encourage their participation in

China’s financial sector. This shows China’s readiness and confidence to embrace a

more open financial market in the period ahead. According to the data released by the

China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities

Regulatory Commission (CSRC), as of the end of 2017, China had seen banks from 14

countries and regions set up 38 wholly foreign-owned subsidiaries and one joint-

venture bank, 73 foreign banks from 30 countries and regions set up 122 branches,

and another 143 banks from 46 countries and regions establish 163 representative

offices. The data also show that about 10% of the total securities firms in China were

joint ventures, and nearly one-third of property insurance companies and life insurance

companies were foreign-owned or joint ventures. As foreign financial institutions have

stepped up efforts to expand their presence in China, the Chinese financial institutions

have also actively expedited their globalization strategies by bringing in foreign

strategic investors and implemented their "going global“ initiatives through mergers

and acquisitions, equity participation, and the establishment of new outlets.

Leveraging networks spread all over the world, they have established connections with

more banks globally via a variety of business approaches. The CBIRC data indicates

that, as of the end of 2017, 23 Chinese banks had established 238 tier-1 entities in 65

countries and regions, and 10 of these banks had established 68 tier-1 entities in 26

countries along the “Belt and Road”.

The opening up of China’s financial sector has been evidenced in many ways, in

particular the relaxation of restrictions on the structure, location and scope of

business for foreign financial institutions. Since the second half of 2017, the Chinese

government has ramped up efforts to open this important sector. The relevant

domestic financial regulators have followed this move by issuing new policies, creating

greater opportunities for the development of foreign financial institutions.

This EY POV compilation consists of all the previously issued POV reports and is

designed to help foreign financial institutions to understand the big picture of the new

opening-up policies issued recently by the regulators, and what EY can do to assist

foreign financial institutions. EY teams continue to follow the development of new

opening-up policies targeting the financial sector and provide timely, detailed and

thorough policy interpretations for overseas investors.

Jack Chan

Managing Partner, Financial Services, Greater China, EY


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Summary

At a press briefing on 10 November 2017, China's Vice Finance

Minister Zhu Guangyao announced plans to remove caps on foreign

ownership in Chinese financial institutions. Foreign investors now have

indicative timelines showing when they will be allowed to take

controlling stakes in the Chinese financial institutions.

We believe it is a major step forward by the Chinese government

showing its determination and confidence in further opening up of

China’s financial services sector. There are challenges along with the

opportunities for the foreign players. Changes may not be happening

overnight but they are affecting all financial sectors and they will be

seen to be significant over time. We expect the detailed rules to come

out shortly.

Greater foreign ownership could bring in greater competition as well

as the potential to build a more robust, transparent financial services

sector. It would also lay out a solid foundation for the globalization of

Renminbi, the development of the bond and capital markets, and

relaxation of capital inflows and outflows in the future.

We expect that many foreign players will be considering expanding their

investment in China’s financial sector in the near future. However,

given the huge investment cost that may incur in obtaining control over

a large bank, we expect that more acquisitions in the banking sector will

be targeted at the small-sized city commercial banks and rural

commercial banks. On top of the normal financial and legal due

diligence, we believe that proper commercial diligence on the business

model of these banks will be critical. We also expect to see some of the

foreign partners of securities joint-ventures seek to increase their stake

soon. Fund management companies and distressed asset management

companies could also attract foreign investment due to their favorable

growth prospects.

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Improve the capacity to further develop capital markets


4

Our point of viewOn 10 November 2017, the State Council Information Office of the

People’s Republic of China held a briefing to discuss the economic

outcome resulting from the Beijing meeting between the Chinese and

US presidents. Zhu Guangyao, China’s Vice Minister of Finance,

explained the specific points of the agreement in the economic field

which had emerged from the consensus reached by the two

government leaders.

In order to implement the opening-up initiatives put forth at the 19th

CPC National Congress, China will liberalize the foreign ownership

limits for institutions in the financial services sector.

► Foreign investors will be allowed to own as much as 51% of shares

in a joint venture in securities, fund management and futures

brokers. The cap will eventually be phased out in three years.

► Current foreign ownership restrictions in Chinese banks and

financial asset management companies will also be removed.

► After three years, foreign investors will be allowed to own up to

51% of shares in joint ventures in life insurance, with phase-out of

the cap in five years.

We see this move as the most significant break-through in recent

years, showing that the Chinese government has decided to massively

open up its financial sector to foreign investors by allowing the latter

to take controlling stakes in Chinese financial institutions with

indicative timelines.

Since China’s accession to the WTO in 2001, China has gradually

relaxed restrictions on foreign financial institutions relating to

establishment type, geographical location and business scope.

According to the data published by CBRC, CSRC and CIRC, by the end

of 2016, foreign-funded banks had established 1,031 outlets in 70

cities across 27 provinces in China and held 1.3% of the total assets in

the domestic banking system. Among securities companies in China,

Sino-foreign joint ventures accounted for 10% by number. Foreign-

capital and Sino-foreign joint ventures together accounted for nearly

one third of total insurers. Meanwhile, Chinese-capital financial

institutions have also actively deployed international strategies, both

domestically to attract foreign strategic investors, while in other

countries pursuing a "go global" strategy through mergers and

acquisitions, equity holdings and establishment of a new operating

presence. With antennae stretching across the globe, they are

engaged in diverse operations bringing them together with more and

more financial institutions worldwide. As of 2016 year-end, a total of

22 Chinese-funded banks commanded 1,353 branches in 63 overseas

countries and regions.

As foreign investors take larger stakes and gain more decision-making

power, they will have larger influence over the big decisions of product

innovation, market building, business models and management

expertise. With China’s growing middle-class and aging population, the

greater market access will offer foreign institutions a great

opportunity in wealth management, private banking, and retirement

business. Further liberalization of the financial sector also can drive

the creation of a stronger and more competitive financial industry in

China.

The increased competition will push Chinese financial institutions to

become more efficient in how and where they lend and invest money.

They will have a chance to replicate the technology, legal frameworks

and expertise concentration from their foreign investors. Competitive

strengths and market opportunities will continue to guide foreign

banks to evolve and choose different paths of expansion. While some

are building a retail presence and expanding their networks, others

focus on narrow market niches.

Although relaxed foreign-ownership limits for financial institutions

represent an important step forward in opening up the financial

services sector. Foreign investors are able to obtain controlling

stakes in these financial institutions through acquisition or

increasing their existing equity holding, the changes won’t come

easy. Some of observations and initial thoughts below might be

worth considering:

1. The announcement leaves some questions unanswered, such as

the explicit date when the liberalization would become effective

and how it would be implemented. But it is foreseeable that this

will be announced in the near future.

2. The timelines for liberalization vary by sector:

I. Banks and asset management companies

The current foreign ownership caps in these companies (individual

foreign shareholder: 20%, all foreign shareholders: 25%) will be

removed. Foreign shareholders will be subject to the same

restrictions as the local shareholders. It is expected that foreign

investors will be able to take a controlling stake through new

acquisition or increasing an existing equity holdings from the

effective date for this group of financial institutions. Factors to be

considered:

► The big-5 state-owned commercial banks (tier 1 banks) and

some of the joint-stock national banks (tier 2 banks) as well as

some of the city commercial banks and rural commercial banks

(tier 3 and tier 4 banks) are listed in Hong Kong, which requires

that any acquisition / increase in existing equity holdings in these

banks to 30% or more must include a mandatory general offer to

all incumbent shareholders, which would imply huge investment

cost. But, more importantly, this would facilitate foreign

investors’ strategic move to gain entry or increased footprint in

mainland China.

► Most of the tier 3 and tier 4 banks tailor their operations to the

local conditions of the host city or region. In view of the

differences in market maturity, culture, risk characteristics and

potential between cities/ regions, on top of the normal financial

and legal due diligence, we believe that commercial diligence on

the business models of these banks will be critical.

► Commercial banks in mainland China have been facing severe

competition and disruption from the Fintech giants such as

Alibaba, Tencent and the non-bank financial institutions that

employ advanced technology in providing banking services. As a

result, there is urgency for traditional commercial banks to drive

in-depth transformation to keep pace with the competition and

disrupt the disruption, this may mean continuous heavy

investment in technology over the next couple of years.

► We don’t anticipate immediate acquisitions by foreign financial

institutions in the near term, but that banks with existing

presence in mainland China will refine their strategies and may

make future investments to grow their footprint in strategic

regions.

Foreign investors are expected to gain greater access to the

distressed assets market and participate in the competition as the

foreign ownership in asset management companies are relaxed, thus

increasing the market efficiency.


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II. Securities firms, future traders and fund/ asset managers

Foreign investors will be able to increase their equity holdings in

financial institutions under this category to 51% on the effective day

(the current cap is 49% and might be raised to 51% under CEPA

arrangement); three years after the effective day foreign investors

will be allowed to increase their investment to 100% - in other words,

these financial institutions would be completely liberalized to foreign

investors after three years.

Financial institutions in the mainland in this category are facing similar

challenges as the commercial banks. We believe that some foreign

financial institutions with existing stakes in mainland securities firms

will look to increase them in the near term upon liberalization.

We believe the opening up of the securities industry will be beneficial

to the growth in China’s capital market. It will not only improve

brokerage, investment banking and other securities services by

introducing foreign competition, but also facilitate the attraction of

global capital investments into A-Share markets. We foresee a new

era of growth for China’s capital market and the securities industry in

the medium term.

III. Insurers

Foreign investor will be able to increase their equity holdings in life

insurers to 51% three years after the effective day. These would be

completely liberalized to foreign investors after five years. As the life

insurance business is the last business which has not been liberalized,

the insurance sector will be fully opened to foreign investors after

five years.

This may not have immediate impact on the insurance landscape as

most large insurance players already have presence in China. In the

longer term as far as 3 or 5 years of time, certain foreign players

may be interested to increase their stakes in their insurance JVs or

acquire those stakes from their current JV partners. Some large

foreign insurance players might also consider to invest in leading

asset management companies to elevate their investment

capabilities and increase investment returns.

We may also see large reinsurance companies expand their presence

in China through investment, partnerships, alliances or even

acquisitions in the long term.

Conclusion

China’s move to further open up the financial sector presents both opportunities and challenges for foreign investors. Getting the selection,

timing and approach all in alignment for an investment into a financial institution involves in-depth consideration of due diligence results,

investment strategy, licensing/ incorporation and special audit, etc., each of which can influence the transaction in a different way. Therefore,

the most successful foreign investors will be those that get well-prepared in all the related aspects along this journey.


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SummaryA month after we released EY’s Point of View “China Further Opens

Up Financial Sector (I)” to share our interpretation of China‘s Vice

Finance Minister Zhu Guangyao November 2017 announcement of

nationwide plans to remove caps on foreign ownership in Chinese

financial institutions, the China Banking Regulatory Commission

(CBRC; currently called “CBIRC”) issued the Decision of the CBRC on

Revising the “Implementation Measures of the CBRC for

Administrative Licensing Matters Relating to Foreign-funded Banks”

(“Implementation Measures”) on 24 February 2018 to flesh out

implementation policies reflecting the broad initiative of ”promoting

the formation of a new landscape for all-round opening-up” set forth

in the 19th National Congress of the Communist Party of China

We view CBRC’s release of the Implementation Measures in quick

response to the Ministry of Finance (MOF) announcement as a clear

signal of the government’s commitment to further opening up and

streamlining of administration, and demonstrates the determination

of the CBRC to continuously support foreign banks to participate in

the Chinese market and to build a fair and transparent policy

environment for both Chinese and foreign players.

Our expectation is that foreign banks can look forward to a

smoother road to investing into China’s financial sector following the

promulgation of this round of Implementation Measures and further

implementation rules.

Comparative analysisThe CBRC has signaled its intentions to provide foreign banks with

improved operational accessibility to the Chinese market through

amendments to the Implementation Rules of the CBRC for

Administrative Licensing for Foreign Banks (Order of CBRC [2015]

No.4) (“Former Rules”) which further open up the banking sector and

streamline administration.

The Exposure Draft introduced four new rules, revised five original

rules and removed 14 old rules. CBRC summarized the amendments

along the following three aspects:

► Provide an explicit legal basis for inbound investment by adding

rules applicable to foreign banks in China either investing in

newly-established domestic corporate entities or taking equity

holdings in existing banks operating domestically.

► Apply a reporting mechanism to replace the previous approval

system on foreign banks’ overseas wealth management business,

custody services for overseas wealth management, custody

services for securities investment funds, and the repatriation of

interest-earning assets by foreign financial institutions in the

liquidation process.

► Further standardize the market entry rules for Chinese and

foreign banks, integrate the approval procedures for

establishment and opening of sub-branches, optimize the

conditions for foreign banks to issue debt and capital

replenishment instruments, and simplify the qualification review

procedures for senior executives.

Interpretation to the Implementation Rules on Administrative Licensing for Foreign Banks


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Comparative analysis of policy changesIn this section, we analyze and present our point of view on the three aspects with comparative analysis of specific rules in the Exposure Draft and the

Former Rules.

No. Amendment Former rules Exposure draft Changes

1. Clarify equity investment requirements for foreign financial institutions

1

Add a new chapter

comprising rules on

the establishment

of domestic

corporate entities

by foreign banks as

investors and on

their equity holding

in domestic banking

financial institutions

Previously unspecified

Article 59: A wholly foreign-funded bank or a

Sino-foreign joint-equity bank shall satisfy the

following requirements when applying to

establish or invest in a banking financial

institution in China:

(1) It has a sound and effective corporate

governance structure.

(2) It has effective risk management and

internal control.

(3) It has good consolidation capability.

(4) Its main prudential regulatory indicators

meet the regulatory requirements.

(5) In principle, its equity investment balance

does not exceed 50% of its net assets

(under consolidated financial statements).

(6) It has a robust and compliant information

technology system, information security

system, and standardized data

management system, and possesses

technologies and has implemented

measures to ensure business continuity,

effectiveness and safety.

(7) It has no record of serious violation of laws

and regulations or of serious cases due to

internal management issues within the

most recent two years (except for

circumstances arising from establishment

of, or equity investment in, banking

financial institutions in China when

implementing inclusive finance policies).

(8) It has booked profits for three consecutive

accounting years.

(9) It has a good regulatory rating;

(10) It satisfies other CBRC prudential

regulations.

Article 60 – Article 62: Specific application

procedures and documents required by CBRC.

Adds rules on the

application conditions,

procedures and

documents for foreign

banks that seek to

establish and invest in the

banking financial

institutions in China.

Our view:We believe the most notable of these nine amendments is the addition of a new chapter that includes rules on licensing requirements,

procedures, and documents for the establishment of, and investment in, banking financial institutions in China. As effective supplements to the

Notice of the General Office of the CBRC on Matters related to the Business Development of Foreign Banks (Yin Jian Ban Fa [2017], No. 12)

issued by the CBRC in March 2017 and the Implementation Rules for Administrative Licensing for Chinese Banks revised in July 2017, these

new rules are designed to remove the blind spots in policies governing the foreign banking entities’ equity investments in banking financial

institutions operating in China, promote further integration of market entry standards for both Chinese and foreign banks and provide a legal

basis for foreign banks making equity investments into the domestic market.

The application procedures and documents and licensing requirements specified in Implementation Measures highlight the CBRC’s regulatory

focus on corporate governance and risk control to ensure that markets remain stable and risks remain under control as foreign banks expand

their presence in China’s financial markets.

Notable by its absence is that the Implementation Measures has not introduced explicit amendments to echo MOF’s decision to remove the

foreign ownership caps in Chinese banks (individual foreign shareholder: 20%; foreign shareholders collectively: 25%). Nonetheless, we believe

that the CBRC will make revisions to the Implementation Rules for Administrative Licensing for Chinese Banks, among other applicable rules

and regulations, with an aim to further open up China’s banking sector.


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2. Abolish rules on approval and licensing for four types of businesses

2

Remove Article

126 – Article 134

of Former Rules

Article 126-134 are included in three sections

in Chapter V: Business Scope

Section 5 (Article 126-128): Development of

Custody Services for Securities Investment

Funds

Section 6 (Article 129-131) : Development of

Overseas Wealth Management Services for

Clients

Section 7 (Article 132-134): Development of

Overseas Wealth Management Custody

Services for Clients

Article 126 to Article 134

are deleted in their entirety.

Apply a reporting

mechanism to replace

previous approval system.

Abolishes rules on

application requirements,

procedures, and

documents for three

types of businesses.

3

Remove Article 95

& Article 96 of

Former Rules

Article 95: Application procedures for the

branch of a foreign bank that repatriates

interest-earning assets after paying off all

liabilities upon approval of shutdown.

Article 96: Application documents required of

the branch of a foreign bank to submit to the

CBRC or its local office for repatriation of

interest-earning assets upon approval of

liquidation.

Article 95 & Article 96 are

deleted in their entirety.

Apply a reporting

mechanism to replace

previous approval system.

Abolishes rules on the

application procedures

and documents for the

branch of a foreign bank

to repatriate interest-

earning assets upon

liquidation.

Our view:The Implementation Measures not only introduces a legal basis for foreign banks to newly enter the domestic market, but also provides

existing foreign banks operating in China with greater flexibility to expand into new business lines or exit from old ones.

Implementation Measures on approval and licensing procedures are replaced with a reporting mechanism for four types of businesses

(overseas wealth management services for clients, overseas wealth management custody services for clients, custody services for

securities investment funds and repatriation of interest-earning assets by liquidated foreign financial institutions), a clear signal of

CBRC’s intentions to minimize administrative licensing and simplify relevant procedures for foreign financial institutions. As expressed

in a CBRC media briefing, this is concurrent with in-process and on-going prudential and dynamic regulation to ensure risk control and

avoid a gap in regulatory coverage.

We believe the relaxation of market entry rules on developing the overseas wealth management services and overseas wealth

management custody services for clients will encourage foreign financial institutions to leverage their global networks to better satisfy

the growing demands of domestic investors seeking to shift their portfolios towards overseas assets and differentiate themselves in

providing services for overseas wealth management.

The removal of the approval procedures on custody services for securities investment funds in the Implementation Measures is clearly

a concrete step towards reducing the administrative burden on foreign banks arising from this new business. However, as these

business areas are governed by comprehensive regulatory cooperation with the China Securities Regulatory Commission (CSRC) and

the Asset Management Association of China (AMAC), the full picture may not emerge until forthcoming policy changes by these two

bodies are announced.

The nullification of approval procedures on the repatriation of interest-earning assets by liquidated foreign financial institutions and

abolishment of rules on the other three types of businesses are also a symbolic indication that CBRC is not merely extending a one-way

invitation for inbound investment, but also taking substantive measures to provide foreign players with efficient market exit options

going forward.


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3. Standardize rules on market entry for Chinese and foreign banks

4

Remove Article 50

– Article 52 of

Former Rules

Article 50: The establishment of a

sub-branch is subject to two phases –

application for establishment and

application for operation.

Article 51: Application and approval

procedures for the establishment of

a sub-branch.

Article 52: Documents required to

be submitted to the CBRC or CRBC

local office when applying for the

sub-branch establishment.

Article 50 to Article 52 are deleted

completely.

Abolishes rules on

application requirements

and procedures, as well

as documents needed

prior to the

establishment of a sub-

branch.

5

Remove Article 53

of Former RulesArticle 53: Specific requirements on

preparations for the establishment

of a sub-branch.

Article 50: An applicant shall

submit the preparation report on

sub-branch establishment to the

CBRC local office or an authorized

office and ask for the application

form for operation three days

prior to start of the preparatory

work.

Replaces the previous

approval system with a

reporting mechanism,

which only requires

foreign banks to submit

the preparation report

and collect the

application form for

operation.

6

Add provisions to

Article 54 of

Former Rules

Article 54: A proposed sub-branch

shall apply for regulatory

acceptance by the CBRC local office

or an authorized office upon

completion of the preparatory work.

……

A copy of the approval decision or

rejection decision on operation shall

also be sent to the CBRC and its

local office. In case of a rejection,

reasons shall be elaborated.

Article 51: An applicant shall

complete the preparatory work

within nine months from the

submission of the preparation

report for sub-branch

establishment and apply for

regulatory acceptance by the CBRC

local office or an authorized office.

……

A copy of the approval decision or

rejection decision on operation

shall also be sent to the CBRC and

its local offices. In case of a

rejection, reasons shall be

elaborated. An applicant that fails

to timely submit the application

for operation shall report to the

CBRC local office or an authorized

office.

Abolishes rules on the

application for a

prolonged period of

preparation for

establishment, and

extends the preparation

period from six months

to nine months.

Abolishes penalty rules

against failure to submit

an application for

operation that results in

invalidation of

preparation approval

documents; in case of

missed deadlines, the

applicant shall report to

the CBRC local office or

an authorized office.

7Revise Article 112

of Former Rules

Article 112: A wholly foreign-funded

bank or Sino-foreign joint-equity

bank shall satisfy the following

requirements on issuing debt and

capital replenishment instruments

within the territory of China as

approved by the CBRC:

……

(3) The results of risk-based loan

classifications are true and accurate;

(4) It has no record of serious

violations of laws and regulations or

of serious cases caused by internal

management issues within recent

three years;

(5) Other prudential requirements

set forth by the CBRC are met.

Article 111: A wholly foreign-

funded bank or Sino-foreign joint-

equity bank shall satisfy the

following requirements on issuing

debt and capital replenishment

instruments within the territory of

China as approved by the CBRC:

……

(3) The results of risk-based loan

classifications are true and

accurate;

(4) Provision coverage ratio meets

the requirements and loan loss

provisions are adequate;

(5) Other prudential requirements

set forth by the CBRC are met.

Requirements on issuing

debt and capital

replenishment

instruments by foreign

banks are shifted from

the perspective of legal

compliance to regulatory

compliance.


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3. Standardize rules on market entry for Chinese and foreign banks (continued)

8

Remove part of

provisions of Article

114 of Former

Rules

Article 114: Where a wholly foreign-

funded bank or Sino-foreign joint-

equity bank applies for issuing debt

and capital replenishment instruments,

the following documents shall be

submitted to the CBRC or its local

office:

……

(10) Report on credit ratings on

financial bonds and statement on on-

going rating arrangements issued by a

credit rating agency;

(11) The letter of legal opinion issued

by a law firm duly established within

the territory of China;

(12) Other documents as required by

the CBRC.

Article 113: Where a wholly

foreign-funded bank or Sino-

foreign joint-equity bank

applies for issuing debt and

capital replenishment

instruments, the following

documents shall be submitted

to the CBRC or its local office:

……

(10) Report on credit ratings

on financial bonds and

statement on on-going rating

arrangements issued by a

credit rating agency;

(11) Other documents as

required by the CBRC.

Abolishes requirements

on the letter of legal

opinion included in the

application documents.

9Revise Article 143

of Former Rules

Article 143: A person does not need to

re-apply for qualification review if

he/she is to be moved to a post at the

same level, or at a lower level, at the

same legal entity, provided that

he/she is qualified for acting as a

senior executive and his/her period for

continual interruptions of office is not

more than one year. The proposed

person shall, within five days from

his/her appointment, report to the

CBRC or its local office.

Article 133: A person does not

need to re-apply for

qualification review if he/she is

to be moved to a post at the

same level or at a lower level

(or concurrently), at a foreign

bank of the same type and

same nature, provided that

he/she is qualified for acting as

a senior executive and his/her

period for continual

interruptions of office is not

more than one year. The

proposed person shall, within

five days from his/her

appointment, file with the

CBRC or its local offices.

Relaxes the

requirements on

qualification review of

senior executives of

foreign banks.

Our view:The Implementation Measures also introduced related reforms towards integrating the market entry standards for both Chinese and

foreign banks. The changes can be summarized as follows: (1) the approval procedures for the two phases of establishing a sub-branch

(application for establishment preparation and application for operation) were combined into one, with operation approvals remaining

effective and the period of preparation extended by three months; (2) the requirements for foreign banks to issue debt and capital

replenishment instruments were optimized, and the requirements on application documents were simplified, with a focus on regulatory

compliance; and (3) the qualification review procedures for senior executives of foreign banks were simplified, and filing, rather than

pre-approval, is sufficient in cases of transferring an executive to a post at the same or a lower level at a foreign bank of the same type

or same equity-holding nature.

The above amendments highlight the CBRC’s efforts to provide more equal national treatment and facilitate more efficient business

development of foreign banks through greater standardization of the requirements for Chinese and foreign banks in market entry,

business access and senior executive qualification review. Foreign banks will also see an ease in their administrative burden for

establishing a sub-branch following the consolidation of approval procedures for the preparation and operation phases. As compared

with the Implementation Rules for Administrative Licensing for Chinese Banks (revised in July 2017), the Implementation Measures takes

another step towards greater consistency in regulatory standard setting of both Chinese and foreign banks and enhances the alignment

between requirements and related procedures.


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EY insights and perspectivesWe believe that the Chinese government will further accelerate financial reform and market opening concurrent with the steady

development of national strategies such as RMB internationalization, the launch of pilot free-trade zones and the Belt and Road

initiative, and in line with the key messages of the 19th CPC National Congress. The CBRC’s Exposure Draft presents substantial

proposed changes to clarify the requirements for equity investment by foreign financial institutions, simplify the entry rules on new

business for existing foreign banks operating in China and standardize the Chinese market entry requirements for foreign banks. These

policy changes reflect the Chinese government’s determination to open up its financial markets and boost the confidence and

sentiment among foreign financial institutions that seek to invest in China.

The Chinese government’s financial regulatory reforms to open up the market and streamline administration will undoubtedly bring

business opportunities to foreign investors. However, foreign institutions will face challenges in responding to the ongoing and

forthcoming financial reforms, such as reviewing their strategic plans for the Chinese market, selecting investment targets, and

reallocating resources to new businesses. They will need to have a holistic view of investment in order to seize the emerging

opportunities and minimize the exposure to risks from the transformation. Foreign investors should maintain a cautiously optimistic

attitude in embracing China’s progressive opening up of its financial markets.

The finalized version and forthcoming detailed implementation rules issued by other financial regulators need to be watched to

determine the ultimate effects of the Exposure Draft. Still, baseline predictions of CBRC’s forthcoming detailed rules suggest that we

can also expect other financial regulators to follow suit with related policies to open up the financial sector, so as to form a regulatory

synergy that substantially benefits the foreign financial institutions as part of China’s financial reforms.

We will continue to stay apprised on the regulatory developments and market responses to present analysis of the impact of new

regulations on foreign financial institutions.


12

SummaryThe China Securities Regulatory Commission (CSRC) published the

Measures for the Administration of Foreign-funded Securities

Companies (“Measures”) on 28 April 2018 as a step towards

implementing the central government’s call for “substantially

liberalizing market access and further opening up the financial services

sector."

It follows the announcement by China‘s Vice Finance Minister Zhu

Guangyao of nationwide plans to remove caps on foreign ownership in

Chinese financial institutions at a press briefing immediately after the

November 2017 Sino-US summit.

The Measures mark the second announcement by a domestic regulator

towards further financial market liberalization, following the 24

February 2018 issuance of the Decision on Amending the

Implementation Rules of the China Banking Regulatory Commission on

Administrative Licensing for Foreign Banks. It is a clear welcome sign

from the CSRC to foreign financial institutions seeking to actively

participate in China’s financial market. Once in effect, foreign

investors are allowed, singly or in concert, to hold up to 51% of

shareholding in securities companies directly or indirectly, and

subsequently the cap would be removed completely within three years.

Throughout the 19th National Party Congress, the National People's

Congress and the People's Political Consultative Conference, national

leaders emphasized that China would accelerate the pace of opening

up to the outside world, heightening expectations for further opening-

up of policies in China’s financial sector.

Comparative analysisThe Measures serve as a revision to the existing Rules for the

Establishment of Foreign-invested Securities Companies (the “Former

Rules”), reflecting the policy-making principles of continuity, gradualism

and forward-looking perspective, moving towards the objective of

opening up China’s securities industry by streamlining requirements for

establishing joint ventures and expanding their business scope.

The Measures are comprised of 26 articles which altogether introduce

one new rule and remove four old ones, while introducing substantive

changes to seven original rules and text-level revisions to another 17.

The revisions can be summarized into the following five areas, echoing

the written descriptions provided by the CSRC:

► Allow foreign investors to gain control of joint venture securities

companies; provide a legal basis for foreign investors to increase

their proportionate holdings to take a controlling stake

► Phase out business scope restrictions for joint venture securities

companies

► Improve the rules for foreign shareholding in listed securities

companies

► Clarify the policies over the legal status of a domestic securities

company following change in the actual controller of a domestic

shareholder

► Improve the eligibility criteria applicable to foreign shareholders.

3

Interpretation to the Measures for the Administration of Foreign-funded Securities


13

1. Allow foreign investors to gain control of joint

venture securities companies; provide a legal

basis for foreign investors to increase their

proportionate holdings to take a controlling

stake

The main amendments in this part are as follows.

Firstly, the requirement for foreign investors to seek a domestic

securities firm counterpart to establish a joint venture securities firm

was removed. Secondly, the foreign shareholding proportional

restriction clause in the Former Rules was removed, which marks the

most fundamental change introduced in the Measures and also serves

as the regulatory basis for allowing foreign-controlled joint venture

securities companies.

Together with lifting caps on the shareholding proportion, the CSRC has

also made certain restrictions on the currency denomination of capital

contributions as well as the lower limit of the shareholding proportion

by foreign shareholders. Article 7 requires that foreign shareholders

invest with freely exchangeable currency. The proportion of foreign-

invested securities companies held by overseas shareholders (including

direct and indirect control) should be in line with the overall

arrangements for opening up China's securities industry.

2. Phase out business scope restrictions for

joint venture securities companies

The Measures allows newly-established joint venture securities

companies to initially apply for four types of businesses (as defined by

Article 125 of the Securities Law and the Provisional Regulations on the

Approval of the Business Scope of Securities Companies) in line with

their own circumstances. Further expansion into up to two additional

business types per application will be considered from the second year.

The business types and associated minimum registered capital

mandated by the Securities Law are as follows:

This phase out of business scope restrictions for joint venture

securities companies stands alongside the relaxation of shareholding

caps as the two key changes introduced by the Measures. The

Measures remove the various business scope restrictions applicable to

joint venture securities companies. However, the Measures still lack

explicit provisions regarding the specific business areas open to

foreign-funded securities companies by application.

To prevent a haphazard rush to grab up securities business licenses,

the CSRC has included a provision in the Measures (new rule (2) to

Article 5) that keeps the initial business scope for a foreign-funded

securities company within the bounds established by the industry

experience of the controlling shareholder and the largest shareholder.

3. Improve the rules of foreign shareholding in

listed securities companies

The Measures removes the 25% shareholding cap for collective foreign

investors. Article 22 specifies that collective foreign shareholdings

(including direct and indirect ownership) in listed domestic securities

companies shall be raised to a ratio "not exceeding commitments

made towards opening up China's securities industry“, which is aligned

with the upper limit of foreign shareholding applied to unlisted firms.

The changes in foreign shareholding percentages which will be

introduced upon the effectiveness of the Measures are summarized in

the following table.

Comparative analysis of policy changes

Business typeRegistered capital

requirement (CNY)*

(1) Securities broking Minimum 50 million

(2) Securities investment consulting Minimum 50 million

(3) Financial advisory related to

securities trading and investment

activities

Minimum 50 million

(4) Securities underwriting and

sponsoringMinimum 100 million

(5) Securities proprietary business Minimum 100 million

(6) Securities asset management Minimum 100 million

(7) Other securities-related business Minimum 100 million

* For a company with more than two businesses from items four to seven,

the minimum amount of registered capital is CNY 500 million. The

registered capital of a securities company should be contributed paid-in

capital.

Requirements on

foreign shareholding

proportion

Former Rules The Measures

Unlisted firmsNo more than

49%

Not exceeding

commitments

made towards

opening up

China's securities

industry (no less

than 25% in

principle*)

Listed

firms

Single

foreign

investor

No more than

20%

Not exceeding

commitments

made towards

opening up

China's securities

industry

All foreign

investors

No more than

25%

Not exceeding

commitments

made towards

opening up

China's securities

industry

*The 25% foreign shareholding floor is waived for domestic securities

companies acquiring foreign-funded status by force of law.


14

List of Joint Venture Securities Companies (as of February 2018)

4. Clarify the policies over the legal status of a

domestic securities company following change

in the actual controller of a domestic

shareholder

This requirement addresses the emergence of “the indirect holding of

shares by foreign investors in certain domestic securities companies due

to the change in the national status of the actual controlling (from

Chinese to foreign ownership)” brought forth by the new regulations. The

Exposure Draft has included the above case within the scope of foreign-

invested securities companies and clarified the requirements. Such

overseas investors are given a time limit to meet the requirements

applied to foreign shareholders.

Article 14 of the Measures specifies the requirements applicable to

domestic securities companies applying for conversion to foreign-

invested status. It denotes that when foreign investors step into the roles

of controlling shareholder or ultimate controller of a domestic securities

company, those overseas investors must meet the conditions stipulated

in Article 6. The shareholding proportion in their indirectly-controlled

securities company must also conform to the provisions in Article 7. If

the requirements are not met at inception, a time limit will be set for

required remediation. Article 6 and Article 7 are set to address the

qualification requirements and investment requirements on foreign

investors, respectively. The application documents for domestic

securities companies to apply for changes to foreign-invested securities

companies are clearly defined in Article 15 of the Measures.

5. Improve the eligibility criteria applicable to

foreign shareholders

The amendments to eligibility criteria for foreign shareholders aim to

bring high-quality foreign shareholders and advanced overseas

management experience into China. The Exposure Draft requires all

foreign shareholders to be “financial institutions”, a change from the

more limited previous requirement to include “at least one financial

institution”. It also adds the following specific qualification

requirements to the former rules demand for “good reputation and

business performance”:

► Good international reputation

► Good business performance

► High global ranking in business scale, revenues and profits for the

preceding 3 years

► Maintenance of high long-term credit ratings for the preceding 3

years

► Not subject to official investigation for serious violation of laws or

regulations

Documents to support these requirements must be submitted to the

CSRC when a joint venture securities firm shifts to shareholding by

overseas investors.

These amendments aim to ensure that foreign shareholders comprise

high-quality companies with extensive experience in financial activities.

More explicit rules are likely to be introduced in the final version to

replace the broad and non-quantified criteria – such as “good” and

“high global ranking” – found in the current version.

No. Name Register time Foreign shareholder(s)Shareholding

ratio

1 China International Capital Corporation1 31 July 1995 GIC Private Limited and others 16.80%

2 BOC International 28 February 2002 BOC International Holdings Limited 37.14%

3 Goldman Sachs Gaohua 13 December 2004 Goldman Sachs Asia Limited 33%

4 UBS 11 December 2006 UBS Limited 24.99%

5 Credit Suisse Founder Securities 24 October 2008 CREDIT SUISSE AG 33.3%

6 Zhong De Securities 10 April 2009 Deutsche Bank 33.3%

7 Morgan Stanley Huaxin2 4 May 2011 Morgan Stanley Asia Limited 49%

8 Citi Orient Securities 4 June 2012 Citigroup Global Markets Asia Limited 33.33%

9 Shengang Securities3 8 April 2016 Willie International Holding Limited/Freeman Securities Limited

30%

10 Huajing Securities 19 August 2016 Maxson Securities Limited 49%

11 BEA Qianhai 9 August 2017 The Bank of East Asia, Limited 49%

12 HSBC Qianhai 28 August 2017 The Hongkong and Shanghai Banking Corporation Limited 51%

*Source: CSRC website, the National Enterprise Credit Information Publicity System and annual reports

1. Foreign shareholders of CICC include GIC(5.478%); TPG(4.31%); Mingly Corporation(3.075%), Oppenheimer Fund(2.017%); KKR Institutions(1.916%), according

to its 2017 annual report

2. Morgan Stanley Asia Limited has increased its shareholding to 49% according to an announcement from Huaxin Holding in 2017 and Morgan Stanley Huaxin’s

website

3. Willie International Holding Limited and Freeman Securities Limited each holds 15%


15

EY insights and perspectivesThe unveiling of the Measures marks a historical new stage in the

opening up of China’s securities industry and represents a positive

contribution to the global financial industry. It presents an

excellent scaling-up opportunity for existing joint venture

securities companies in China, which were previously hobbled by

lack of scale, profitability and market influence, to narrow any gap

in reputation or capabilities with respect to their own overseas

shareholders. New entrants will also benefit from the more

lucrative market environment.

We see the Measures as offering the following opportunities for

the future development of foreign-funded securities firms in the

Chinese market:

► Full liberalization of the shareholding ratio: Prior to the

publication of the Measures, taking a full 51% position in the

shares of the joint venture securities companies was only

specially permitted to Hong Kong- and Macau-funded

securities firms under the Supplementary Agreement 10 to

the Mainland and Hong Kong on the Establishment of Closer

Economic Partnership Arrangements. The Measures remove

this territorial restriction and also lifts the 51% foreign

ownership cap, clearing the path for more proactive strategic

approaches by foreign-funded securities companies to their

development in the Chinese market.

Recognition of the steady opening up of China’s capital

markets can be seen in Morgan Stanley Capital International’s

(MSCI) decision to add mainland China-listed A shares to its

MSCI Emerging Market Index. Feedback from foreign-funded

securities companies also indicates their growing interest in

the Chinese market. Such companies are expected to enjoy a

qualitative improvement in their influence and embrace new

development opportunities following the loosening of the

foreign ownership cap.

► Full opening-up in permitted business activities: The

Measures also loosens restrictions on the business scope of

foreign-funded securities companies. Full national treatment

on par with other Chinese securities companies will follow

from the removal of the original restrictions. In principle,

foreign-funded securities companies will be able to

progressively apply for business licenses in all areas stipulated

in Article 125 of the Securities Law.

Newly-established joint venture securities companies will

immediately be able to move beyond the core activities of

underwriting and sponsorship of stocks and bonds to pursue

licenses for non-investment banking businesses, such as

securities brokerage, investment consulting and proprietary

trading, as long as they can demonstrate a relevant track

record for their controlling shareholders.

Moreover, large foreign financial institutions will enjoy the

opportunity to take a group-wide perspective and fulfill their

ambitions for development in the Chinese market by putting in

place collaborative mechanisms to develop their securities

business in concert with other business pursuits in China.

► Full relaxation of eligibility requirements for joint venture

shareholders: The domestic shareholders of foreign-funded

securities companies will no longer be limited by business type

to securities firms or by territory to free trade zones. This will

provide foreign-funded securities companies with an expanded

pool of eligible domestic business partners and easier

avoidance of direct business competition with their joint

venture counterparts.

However, the new freedom presented by the loosening of the

shareholding ratio, business scope and eligibility criteria poses

new challenges alongside the development opportunities.

► Challenges of operating in varied legal environments and

meeting compliance requirements: Foreign-funded securities

firms expanding their domestic business will encounter fresh

challenges in compliance and risk management, as the

applicability of overseas experience is not guaranteed in

dealing with the varied legal environments and compliance

requirements of China.

The Measures also fine-tune the eligibility criteria for foreign

shareholders, who will now need to show a 5-year track

record in the securities business and a home country

regulatory record free of major blemishes for the preceding

three years. The Measures also raise the bar on business scale,

revenues and profits for the foreign investors in order to

extend a welcome to high-quality companies with extensive

experience in finance. We foresee greater convergence in the

treatment of domestic and foreign capital under the future

regulatory regime, following increased entry by foreign

investors.

► IT system upgrades and facility transfers: Domestic

compliance requirements on data security and confidentiality

may require foreign-funded securities companies to transfer

and host some of their IT systems within China’s borders. In

addition, legacy systems may face capacity challenges in

keeping pace with the transaction volumes and processing

speeds demanded by their China-based business.

► Hiring and training employees to serve business

development needs and fit corporate culture: As foreign

securities firms take controlling stakes and expand their

business scope, they will need to consider how to use

appropriate channels within China to attract personnel

comfortable operating in the home country language and

culture and who are also proficient in China's securities

business. A further medium- to long-term challenge is

presented by the rolling out of talent training processes in line

with both business development needs and the firm's

corporate culture.

Release of the Measures is a catalyst for opening up the Chinese

securities industry to foreign capital, bringing in additional

international development experience and increasing competition

within the industry. Although the Measures already provide

relatively clear operational guidance for foreign investors wanting

to enter the Chinese securities markets, as stated above, some

details remain to be fleshed out. We will continue to closely follow

any interim updates leading up to the final version of the

Measures to further analyze the impact of the new regulations on

foreign financial institutions.


16

SummaryThe day following President Xi Jinping’s speech at the opening

ceremony of the Boao Forum for Asia on 10 April 2018 announcing

China would substantially relax restrictions on access to its financial

markets, Yi Gang, the Governor of the People’s Bank of China (PBOC),

laid out 12 liberalization measures for the financial sector tied to a

clear timetable at the Monetary Policy Normalization Sub-forum on 11

April (Please refer to the previous POV: China Further Opens Up

Financial Sector (III) and Appendix for details). On 27 April, the Chinese

Banking and Insurance Regulatory Commission (the “CBIRC”) published

on its official website the “Initiative of CBIRC to Expedite the Market

Opening-up for the Banking and Insurance Industries” (the “Opening-up

Initiative”) together with two related documents, the “Notice of the

CBIRC on Expanding the Business Scope of Foreign-funded Insurance

Brokerage Companies” and the “Notice of the Office of the CBIRC on

Further Relaxing Market Access for Foreign-funded Banks”.

Release of the Opening-up Initiative marks an efficient and active

response to the new propositions set forth at the Boao Forum for Asia

as well as President Xi’s appeal to ensure quicker implementation of

the previously announced major opening-up measures and endeavor to

bring the benefits of China’s opening-up to global enterprises and

people as early as practicable. The Opening-up Initiative aims to drive

forward the implementation of those announced financial opening-up

measures from the perspective of the CBIRC. We believe that by

facilitating the foreign investment and expanding the scope of business

of foreign financial institutions, the Opening-up Initiative can be

expected to further improve the national treatment and business

environment for them.

In the following sections, we will refer to and summarize specific

contents from the Opening-up Initiative and Notices of the CBIRC, and

put forward our point of view.

4

Interpreting the CBIRC’s Initiative to Expedite the Market Opening-up for the Banking and Insurance Industries


17

Key notes of the Policy

According to the announcement of the CBIRC, the key aspects of the

Opening-up Initiative are as below:

► Facilitating foreign investment, including removing caps on the

foreign shareholding ratios in domestic banks and financial asset

management companies, treating domestic and overseas investors

with identical equity investment rules; lifting restrictions on the

foreign shareholding proportion in financial asset investment

companies and wealth management companies newly established

by commercial banks; encouraging the influx of foreign capital into

banking industry areas such as trust business, financial leasing,

auto finance, currency brokerage and consumer finance; and

relaxation of shareholding ratio cap for life insurance companies

initially to 51%, followed by complete phase-out within 3 years;

► Relaxing the requirements on establishing an entity with foreign

capital, including policies to allow foreign-funded banks to establish

both branches and subsidiaries in China, and to abolish the

requirement of a 2-year representative office presence prior to the

establishment of a foreign insurance company;

► Expanding permitted business scope of foreign-funded institutions,

including abolishing the requirement for foreign banks to be subject

to a 1-year waiting period before applying to engage in RMB

business; allowing the branches of foreign-funded banks to

distribute and redeem (in an agent capacity) or underwrite

government bonds; lowering the single-unit minimum threshold to

RMB 500,000 for the branches of foreign banks to accept retail

time deposits, and allowing eligible foreign investors to operate

insurance agency business and insurance assessment business;

► Optimizing supervision over foreign-funded institutions, apply a

consolidated assessment mechanism to the domestic branches of

foreign banks, and adjust the requirements over the operating

capital management of the branches of foreign banks.

Concrete actions

To ensure early implementation of these measures, the CBIRC is

accelerating the development of the applicable laws and regulations

and supporting policies. In the immediate future, a series of

substantive measures are to be rolled out as follows:

► Issuance of the “Notice on Further Relaxing Market Access for

Foreign-funded Banks” (refer to Appendix II for details).

► Issuance of the “Notice on Expanding the Business Scope of

Foreign-funded Insurance Brokerage Companies” (refer to

Appendix III for details).

► Opening the “Decision of CBIRC to Abolish and Amend Certain Rules

and Regulations (Exposure Draft)” to public comment.

2

Policy interpretation

Our viewThe Opening-up Initiative further consolidated the below

measures proposed by Yi Gang at the Boao Forum for Asia to

facilitate the promulgation of the forthcoming implementation

rules:

► Removes caps on the foreign shareholding ratios in

domestic banks and financial asset management companies

to provide equal treatment for domestic and overseas

investors; allows foreign-funded banks to establish both

branches and subsidiaries.

► Allows qualified foreign investors to operate insurance

agency business and insurance assessment business in

China.

► Expands the business scope of foreign-funded banks

substantially.

► Abolishes the requirement of a 2-year representative office

presence prior to the establishment of a foreign insurance

company.

In addition to the greater specificity of these measures, the

CBIRC has optimized the regulatory rules on foreign-funded

banks in its supervisory capacity. More regulatory changes are

expected after the expansion of business scope of foreign-

funded insurance companies.

Meanwhile, as part of the concrete actions described in the

Opening-up Initiative, the “Notice on Further Relaxing Market

Access for Foreign-funded Banks” and the “Notice on

Expanding the Business Scope of Foreign-funded Insurance

Brokerage Companies” have been issued on 27 April 2018. The

“Decision of CBIRC to Abolish and Amend Certain Rules and

Regulations (Exposure Draft)” is still not officially released yet.

We will follow up on the regulatory updates.


18

SummaryFollowing the announcement by China‘s Vice Finance Minister Zhu

Guangyao of plans to remove caps on foreign ownership in Chinese

financial institutions at a press briefing immediately following the

November 2017 Sino-US summit, the China Banking and Insurance

Regulatory Commission (CBIRC), China Securities Regulatory

Commission (CSRC) and other major regulatory institutions have

introduced new policies to further open up China’s financial sector.

On 10 April 2018, President Xi Jinping made a speech at the opening

ceremony of the Boao Forum for Asia announcing China would

substantially relax restrictions on access to its financial markets. Yi

Gang, the Governor of the People’s Bank of China (PBOC), laid out 12

liberalization measures for the financial sector at the Monetary Policy

Normalization Sub-forum the following day. (For details, please refer

to preceding issues I to IV of this “China further opens up financial

sector” series.)

These events show that China’s financial industry opening-up has

entered a new stage and will impact all sectors (including banking,

securities, insurance and asset management) to varying degrees. As

an example, for the asset management sector, foreign asset

management companies have achieved sound development through

their presence in China. We believe that the new tide of opening-up

will bring new opportunities to both incumbent foreign asset

management companies and those that have not yet entered China’s

market.

In this issue, we will first provide an overview of the four main

approaches that overseas financial institutions currently use to enter

China’s asset management market, then proceed with a comparative

analysis of policy changes.

► Cross-border investment business

► Interconnection of mainland China and Hong Kong stock/bond

markets and mutual recognition of funds

► Public fund business

► Private securities investment fund business

Further, we will explore the opportunities and challenges for foreign

financial institutions to enter China’s asset management market under

the current arrangements.

5

Opportunities and challenges for overseas companies navigating China's asset management industry


19

1. Cross-border investment business

At present, QFII, RQFII, QFLP and other schemes allow overseas

financial institutions to invest in China; likewise, QDII, QDLP, QDIE and

others allow for outbound investment by their domestic counterparts.

Table 1 - Breakdown of cross-border investment mechanisms by

applicable area summarizes key aspects of these schemes.

QFII and QDII fund development traces back to 2002 and 2006,

respectively, when they were introduced as transitional arrangements

to bring in foreign capital and open capital markets in a limited way as

China's capital accounts were not yet fully open.

Since 2010, regulatory authorities in Shanghai, Shenzhen and other

cities have rolled out QFLP, RQFII, QDLP, QDIE and other schemes,

differing from QFII and QDII primarily with respect to entry requirements

and investment scope.

The gradual opening-up of China's capital market traces a path of

increased relaxation of investor eligibility requirements and investment

scope from the early stages of QFII and QDII to QFLP, RQFII, QDLP and

QDIE and progressive liberalization of the capital account, of which all

are promising for further development of cross-border investment.

As of August 2018, the approved quotas for QFII, RQFII and QDII stood

at USD100.46 billion, RMB627.47 billion (approximately USD91.80

billion) and USD103.23 billion, respectively.

2. Connecting stock/bond markets and realizing

mutual recognition of funds between mainland

China and Hong Kong

Efforts to connect the financial markets of mainland China and Hong

Kong have been fast-tracked following Premier Li Keqiang’s speech at

the Boao Forum for Asia on 10 April 2014, promoting a new round of

high-level opening-up.

► The CSRC officially approved the Shanghai-Hong Kong Stock

Connect Scheme for a trial basis on 10 April 2014, and the scheme

was formally opened from 17 November 2014.

► On 22 May 2015, the CSRC and the Hong Kong Securities and

Futures Commission (HKSFC) signed a memorandum of regulatory

cooperation on the Mainland-Hong Kong Mutual Recognition of

Funds (MRF) initiative, and issued the Provisional Rules for

Recognized Hong Kong Funds, effective from 1 July 2015.

According to the Operating Guidance for Fund Management related

to Cross-border Fund Issuance and Sales by Mainland and Hong

Kong Securities Investment Funds, the initial investment quota for

the MRF is set at RMB300 billion (USD 43.90 billion) for fund flows

between Hong Kong and the mainland each way.

► On 5 December 2016, the Shenzhen-Hong Kong Stock Connect was

officially launched by the CSRC and HKSFC.

► On 2 July 2017, the People‘s Bank of China (PBOC) and the Hong

Kong Monetary Authority (HKMA) issued an announcement to

approve the launch of the Bond Connect scheme between Hong

Kong and Mainland China, starting with trial operation of

“Northbound Trading" the following day.

► Among the twelve liberalization measures for the financial sector

announced by PBOC Governor Yi Gang, one of which addresses the

further improvement of the interconnection mechanism between

the mainland China and Hong Kong stock markets by quadrupling

the daily transaction quota starting 1 May 2018. As a result, the

daily quota of Shanghai Stock Connect and Shenzhen Stock

Connect was raised from RMB13 billion to RMB52 billion

(approximately USD7.55 billion), while that of Hong Kong Stock

Connect was raised from RMB10.5 billion to RMB42 billion

(approximately USD6.10 billion).

► PBOC Governor Yi Gang further proposed to connect the Shanghai

and London stock markets. Preparatory work for the Shanghai-

London Stock Connect Scheme is on track for launch before 2018

year-end.

Realization of these stock/bond interconnection schemes and the

mechanism of mutual recognition of funds between the mainland and

Hong Kong are milestones in the further integration of the two capital

markets. Future plans to launch the Shanghai-London Stock Connect

Scheme are a further step towards the interconnection of the mainland

markets beyond China’s borders.

Background

The official statistics of the Asset Management Association of China (AMAC) show that domestic securities and futures firms held US$8.2 trillion in

assets under management (AUM) in their asset management business divisions at 2017 year-end. This sector boasts an AUM compound annual

growth rate (CAGR) of 38% in the past three years, making it one of the fastest growing markets in the world.

This rapid growth not only lays the necessary foundation for business expansion by domestic players, but also attracts more overseas financial

institutions to enter the China market. Overseas investors currently enjoy the following options to access China's domestic market.

Main approaches to enter China’s asset management market


20

Abbr. Summary Applicable cities

QFII

Qualified Foreign Institutional Investor refers to overseas fund management institutions,

insurance companies, securities firms and other asset management institutions that are

approved by CSRC and obtain a quota approved by the State Administration of Foreign

Exchange (SAFE) to invest in the domestic securities market.

Nationwide

RQFII

RMB Qualified Foreign Institutional Investor refers to overseas legal persons that are approved

by CSRC and obtain a quota approved by SAFE to use RMB from overseas to invest in the

domestic securities market.

Nationwide

QFLP

Qualified Foreign Limited Partner, also known as a Foreign-invested Equity Investment

Enterprise, refers to enterprises established by foreign companies or individuals to raise funds

from domestic and foreign investors in a non-public manner for investment in private equity

businesses.

Beijing, Shanghai,

Shenzhen, Tianjin,

Chongqing, Qingdao, etc.

QDII

Qualified Domestic Institutional Investor refers to domestic fund management companies,

securities firm and other entities transacting in securities that have been approved by CSRC to

raise funds within China and use part or all of the funds to invest in overseas securities markets.

Nationwide

QDLP

Qualified Domestic Limited Partner refers to domestic individuals or institutional investors who

meet legal requirements to participate in the investment and establishment of overseas

investment fund enterprises and invest in overseas secondary markets.

Shanghai, Qingdao, etc.

QDIE

Qualified Domestic Investment Enterprise refers to domestic individuals or institutional investors

who both meet the criteria set by Provisional Rules on Pilot Programs for Qualified Domestic

Investment Enterprise and also are authenticated by foreign investment fund management

companies approved by the Joint Conference of Shenzhen QDIE Pilot Program.

Shenzhen

Table 1 – Breakdown of cross-border investment mechanisms by applicable area

* Data sources: China Securities Regulatory Commission website, the State Administration of Foreign Exchange website, the respective provincial and municipal people's

government office websites, summary by EY

3. Public fund business

Establishment of joint-venture fund companies received official

blessing in late 2001 with the promulgation of the Interim Provisions

on Equity Participation and Establishment Initiation of Fund

Management Companies by Offshore Institutions (Exposure Draft).

The following year, Rules for the Establishment of Foreign-funded

Fund Management Companies were issued, thus, marking the

beginning of the opening-up of the fund industry. From these early

beginnings, joint-venture fund management companies have grown

vigorously.

The timetable for opening-up of China‘s financial sector announced

during the Boao Forum for Asia signaled a new stage in the

liberalization of China’s public fund industry. At present, among 118

fund management companies, 43 are foreign-funded (refer to

Appendix V: List of Joint-Venture Public Fund Companies for details).

Recent changes to the foreign shareholding caps of fund

management companies are as below:

Table 2 – Change in foreign shareholding ratio of fund management

companies

The Special Management Measures (Negative List) for the Access of

Foreign Investment (2018) jointly issued by the National

Development and Reform Commission and the Ministry of Commerce

on 28 June 2018 initially caps the foreign shareholding ratio of fund

management companies at 51%, with removal of this limit by 2021.

Foreign-funded players in China's public fund industry have exhibited

impressive performance compared with other financial segments,

with the joint-venture fund management companies outshining peers

in the financial opening-up process. Lifting the caps will provide a

larger arena for foreign-funded institutions to apply investment

approaches and philosophies honed in mature markets, injecting new

vitality and opportunities into China's public fund market.

Prior to

30 June 2018

Subsequent to

30 June 2018

Fund management

company

Not exceeding

49%

First relaxing caps

on the foreign

shareholding

proportion to 51%

and ultimately

removing such

restrictions after 3

years


21

*Data sources: Asset Management Association of China website, Summary by EY

As of 2017 year-end, 10 WFOEs had attained approval to operate PFM

business in China and the number is expected to further increase in

2018. The launch of foreign-funded PFM business means advanced

investment methodologies, approaches and technologies from foreign

financial institutions will gradually be introduced to the domestic

market, which will surely inject new players and synergy into China’s

capital markets.

With the consent of the CSRC, the AMAC issued its Q&A on

Registration and Filing of Private Funds (10) (hereinafter referred to as

“Q&A 10") on 30 June 2016.

The Q&A10 clarifies that foreign financial institutions can set up wholly

foreign-owned entities (WFOE) in China to engage in private fund

management (PFM) business, signaling a move towards opening up

China's private securities investment fund market. After the issuance

of the Q&A 10, eligible WFOE are approved to conduct PFM business in

China.

Similar to domestic private securities investment fund managers,

WFOEs registered with the AMAC can conduct PFM business in China.

According to applicable laws and regulations and the self-discipline

rules of the AMAC, the core regulations on fund-raising and

management eligibilities are as below:

Table 3 - Summary of core regulations in developing the PFM business

1 Non-public offerings shall be used to raise funds.

2 No more than 200 qualified investors shall be targeted

for fund-raising.

3 WFOEs shall register with the AMAC.

4 The WFOE foreign shareholders shall be financial

institutions authorized or approved by local financial

regulatory authorities. Securities regulators in the host

country or region of the foreign shareholders shall have

already signed a Memorandum of Understanding on

Regulatory Cooperation with CSRC or other regulators

recognized by CSRC.

5 WFOE and its foreign shareholders shall not have been

subject to any major sanctions by regulators or judicial

authorities in the past 3 years.

6 WFOE shall independently make investment decisions

when carrying out trading in domestic securities and

futures. WFOE shall not issue trading instructions via

foreign institutions or foreign trading systems, unless

otherwise permitted by CSRC.

4. Private securities investment fund business


22

EY insights and perspectivesChina's asset management industry has undergone the

development by leaps and bounds since its gradual opening-up to

foreign investment in the early 2000s. The timetable for further

liberalizing China's financial markets announced during the Boao

Forum for Asia signifies that China's asset management industry

is entering into a new historic stage; a significant and positive

development even for the global financial industry.

We believe that the major development opportunities for foreign

financial institutions in the China market include:

► A rapidly growing market: China’s asset management

industry is developing rapidly. For instance, the public funds

sector, an early mover in the asset management industry, has

grown at a compound annual growth rate of 33% over the past

5 years. Likewise, other sectors in the asset management

industry are also expected to achieve rapid growth amid

China’s on-going efforts to develop the financial markets and

promote independent innovation; signaling that foreign-

funded financial institutions will have more opportunities to

grow and position themselves in the China market.

► Full liberalization of controlling shareholding ratio: Previously

restricted by the Rules for the Establishment of Foreign-

funded Fund Management Companies, foreign-funded financial

institutions were not allowed to hold a controlling stake in

public funds. Some of which were unable to gain a controlling

stake and with minimal impact on some of the decision-making

process in their joint ventures; consequently, opted to

withdraw from China’s market due to strategic considerations.

Since 30 June 2018, such restrictions on foreign ownership

have been withdrawn. Fully liberalizing the shareholding ratio

means that the China market will successively reveal its full

potential value to global players; the foreign investors will

have a stronger voice while the asset management joint

ventures are expected to embrace new development

opportunities.

► More diversified channels for investment：In the early years,

the foreign financial institutions participated in China‘s market

mainly through limited transitional arrangements such as QFII

and QDII, as well as the non-controlling shareholders‘ rights in

public funds companies. China's capital markets have

continuously opened up in recent years, highlighted by the

inclusion of China A-shares in the MSCI Emerging Market Index

in 2017. In addition, with the introduction of QFLP, RQFII,

QDLP, QDIE and related schemes, as well as the liberalization

of the private securities funds sector since 2016, the

overseas financial institutions are allowed access to a full

spectrum of investment businesses in China’s financial

markets, where they have been provided with more diversified

options in developing their local presence.

► Trends in favor of rational investment philosophies and

growing demand for overseas assets: Development of the

asset management market in China has been accompanied by

growing per-capita disposable income and increasing

diversification of investment portfolios, along with increased

demand on allocation of overseas assets. The Chinese market

has also witnessed a shift in investors’ behavior towards a

more mature and rational focus on risk/return tradeoffs and

mid- and long-term returns. This is definitely positive news for

foreign-funded financial institutions.

Foreign investors also face the following challenges while seeking to

take advantage of the opportunities:

► Competition from Chinese enterprises: For foreign-funded

financial institutions expecting to enter China’s market, one of

the major challenges is the competition from local asset

management players that have advantages in fund-raising,

localized operation and industry influence; all attributable to

their local market experience of more than 20 years. As new

entrants to the China market, foreign-funded financial

institutions need to address the very primary task of how to best

leverage their own strengths and areas of specialization.

► China’s legal environment and local requirements on

compliance and risk control: Given the significant difference in

legal rules and requirements on compliance and risk control

between the China market and foreign markets, foreign financial

institutions will face a challenge on this front as they try to

expand their business in China. For example, PBOC, CBIRC,

CSRC and the State Administration of Foreign Exchange (SAFE)

jointly issued the Guiding Opinions on Standardizing the Asset

Management Business of Financial Institutions on 27 April 2018.

The new regulation sets out specific requirements on the

recognition of qualified investors, the nesting and investment

outsourcing of capital management products, the classification

of asset management products, net asset value (NAV)

management, and investment advisory services, which are all

applied to the businesses already conducted in China by

overseas financial institutions. We expect that the regulatory

authorities will continuously improve the regulatory system and

implement strict supervision under the principle of applying

consistent regulations to both domestic and foreign players.

► Localization of IT systems: At present, China's asset

management industry has established a set of system

infrastructure with consistent configuration and inter-

connectivity, which are often incompatible with the systems

used overseas. Accordingly, foreign investors face a challenge

in localizing and configuring their existing overseas system

infrastructure to handle the volume and speed of transactions in

line with China-specific conditions and requirements. In addition,

the Chinese government’s heightened attention to cyber

security presents higher hurdles for improving system

infrastructure to comply with China's cyber security law and

regulations going forward.

► Recruiting and developing employees to address local business

and cultural needs: With the increase of the controlling

proportion and the expansion of business scope, overseas

financial institutions also need to consider how to secure talents

not only familiar with the culture and proficient in the language

of the home country, but also holding expertise in China's asset

management business. In the medium and long term, another

challenge is to establish a system for cultivating talents aligned

with the requirements of business and corporate culture within

China.

With the acceleration of the opening-up of the asset management

industry to foreign capital, more and more overseas investors are

expected to enter the China market; bringing in diversified

international development experience and intensifying the

competition within the industry to a certain level. We believe that

the China market will be a broad stage for overseas financial

institutions going forward. We will also monitor the regulatory

developments and market response, and analyze the implications of

the new policies for overseas financial institutions.


23

Financial Services—Assurance

The financial and regulatory environment is evolving as new products

and businesses continue to emerge in the global financial environment

that is constantly changing with the development and events in the

industry.

As a leading provider of audit services in the global financial industry,

EY adopts effective global audit methods, leverages the most advanced

analytical tools and insights in our audit services, and mobilizes highly

qualified local and global teams to address all the complexities in your

business.

EY is open to any changes and innovations, and is proactive to

integrate the latest technologies into audits, meeting the increasing

requirements of companies, regulators and investors. EY is committed

to continuous innovation in financial audit technologies, including:

► Integrated management Coordinate resources and make optimal

arrangements.

► Multidimensional consideration Consider region- and area-specific

regulatory requirements.

► More focus on risks Adopt risk-based audit method to improve

audit efficiency and effectiveness.

► New audit platform Identify and respond to risks more effectively

and perform real-time monitoring on audit engagements.

► New analysis platform Uncover frauds and exceptions and forecast

high-risk areas based on big data.

► Big data application Provide visual overview based on high-level

indicators of parameters.

EY suggests that foreign financial groups should take the initiative to look into the new regulations and new policies to

understand and analyze the market response and relevant challenges and opportunities so as to benefit as early movers. If you

are interested in the following services or plan to develop related business activities in China’s financial market, EY can provide

you with targeted one-stop services:

What EY can do for you

Financial Services—Advisory

Economic integration has exposed financial institutions to more

internal and external risks. The future winners in the increasingly

competitive market environment will be those financial institutions with

higher comprehensive competitiveness, who have sound internal

control and management systems in place to address such risks.

Committed to deliver comprehensive, professional and leading services,

the Advisory team of EY Financial Services provides all-round high-

quality risk advisory and management advisory services for financial

institutions.

► The Risk Advisory team focuses on financial advisory solutions for

financial institutions addressing specific areas such as internal

control compliance, quantitative analysis of financial risks, capital

and asset liability management, actuarial, risk assurance and

network security, helping clients control risks comprehensively and

effectively.

► The Management Advisory team is devoted to assisting financial

institutions to initiate changes and improvement based on their

own conditions for better performance, providing strategic

planning, client management, channel management, operation

optimization, data governance, financial management and IT

advisory services, and ensuring the effective implementation of

design solutions in actual business environment.

6


24

Financial Services—Transactions

The Financial Transaction team of EY Financial Services is a

professional team established specially for financial institutions

including banking, insurance, securities, asset management,

payment institutions and other FinTech companies. We believe a

professional and dedicated team can provide the continuous and

powerful driving force needed by financial institutions navigating

the financial world.

Our services include:

► Pre-transaction—strategic investment advisory

► Mid-transaction—finance, tax, IT and operation and management

transaction support

► Post-transaction—Operation transaction advisory

We provide services covering all aspects of financial transactions in

the financial industry, and offer financial institutions forward-

looking global insights and in-depth services customized to local

conditions.

We keep abreast of FinTech developments and engage specialists

with experience in FinTech regulation, design and operations

worldwide to provide cutting-edge FinTech advisory services to our

financial institution clients.

Financial Services—Tax

With an in-depth understanding of the background and rules of tax

regulations, the Tax team of EY Financial Services assists financial

institutions to build a virtuous cycle of “business-finance-tax" based

on years of experience in tax practices. Our quality financial tax

services include:

Corporate tax service

► Efficient and accurate tax declaration services

► Tax planning services for compliant tax burden reduction

► Tax health check services for examining tax health and improving

tax management efficiency and compliance

► Special tax advisory services for tax policy changes, specific

financial transaction structures, investment and financing

structures or transaction issues

► Tax dispute resolution services benefit both tax authorities and

corporates

► Tax advisory services in the normal course of business

Transfer pricing service

► Assist in reviewing, documenting, managing and maintaining

transfer pricing policies and processes, developing appropriate

solutions to address transfer pricing issues arising from financial

businesses and cross-border operations of financial institutions

► Provide services ranging from comprehensive supply chain

restructuring to transfer pricing planning, and services from

solving disputes to assisting companies to meet transfer pricing

documentation requirements

► Assist financial institutions in addressing transfer pricing tax risks

and becoming fully functional

International tax service

► Provide analysis of and comments on the latest development of

financial tax policies, investment and financing regulations and tax

authorities

► Assist clients with tax arrangement, planning, reporting and risk

management related to cross-border investment and financing,

financial transaction structuring and transaction rules optimization.

► Assist senior management of financial institutions to make global

tax arrangement based on overall business strategies, and identify

planning opportunities to improve financial business and financial

results


25

Appendix I: Measures to further open up the financial sector announced at the Boao Forum for Asia (BFA) 2018

OutlineYi Gang, Governor of the People’s Bank of China (PBOC), followed

upon Xi Jinping’s speech at the opening ceremony of the Boao Forum

for Asia on 10 April 2018 announcing China would substantially relax

restrictions on market access by announcing a set of liberalization

measures for the financial sector tied to a clear timetable at the

Monetary Policy Normalization Sub-forum on 11 April. The move is a

further indication of the determination and confidence of the Chinese

government in further opening up China’s financial sector.

The breadth and depth of the measures exceeded public expectations,

illustrating China's strong will to embrace free trade and to open up to

the outside world. Since the initiatives have not yet been developed

into implementation rules, we simply summarize them in the

Supplement to this POV for the reference of foreign financial

institutions.

Three principles for opening-up China’s financial

sector

Yi said in his speech that China’s further opening-up of the financial

sector would adhere to three underlying principles as follows:

► Adopting the management model of pre-establishment national

treatment (PENT) subject to a negative list;

► Promoting the opening-up of the financial sector in step and in

coordination with reforms of the exchange rate formation

mechanism and capital account convertibility;

► Guarding against financial risks at all times so that financial

supervision capabilities will keep up with the development of the

opening-up.

12 liberalization measures

Yi announced twelve measures that would be implemented in two

separate phases in 2018.

The first phase, corresponding to the first half of 2018, includes

expected implementation of the following 6 measures:

1. Removing caps on the foreign shareholding ratio in banks and

financial asset management companies, treating domestic and

overseas investments equally; and allowing foreign-funded banks

to simultaneously establish both branches and subsidiaries;

2. Initially relaxing caps on the foreign shareholding proportion in

securities companies, fund management companies, futures

companies and life insurance companies to 51%, then

subsequently completely phasing out within three years;

3. Abolishing the requirement for at least one securities company to

be included among the domestic shareholders of a joint venture

securities company;

4. Fourfold expansion starting 1 May of the daily line of

interoperability to further improve the interconnection and

interoperability mechanism between the mainland and Hong Kong

stock markets. (Specifically, the daily line of Shanghai Stock

Exchange and Shenzhen Stock Exchange will be adjusted from

RMB 13 billion to RMB 52 billion, and from RMB 10.5 billion to

RMB 42 billion for Hong Kong Stock Exchange);

5. Allowing qualified foreign investors to operate insurance agency

business and insurance assessment business in China;

6. Expanding the business scope of foreign-funded insurance

brokerage companies to keep it consistent with that of Chinese-

funded institutions.

The second phase spans to year-end and includes 6 more measures for

implementation:

1. Encouraging the inbound flow of foreign capital into the banking

industry including trust business, financial leasing, auto finance,

currency brokerage and consumer finance;

2. Removing caps on the foreign shareholding proportion in the financial

asset investment companies and wealth management companies

which are newly established by commercial banks;

3. Expanding the business scope of foreign-funded banks substantially;

4. Removing restrictions on the business scope of joint venture securities

companies to keep them in line with those applicable to domestic

institutions;

5. Abolishing the requirement for a 2-year track record as representative

office as a prerequisite for establishing a foreign insurance company;

Yi also stated that preparations for the Shanghai-London Stock

Connection are progressing smoothly, and the launch is expected within

the year 2018 thanks to joint efforts of the Chinese and British sides.

Furthermore, Yi expressed that orderly execution has been achieved for

certain previously announced opening measures in the financial and

service industries, such as the relaxation of market access requirements

for bank card settlement agencies and non-banking payment institutions,

the liberalization of credit rating services for foreign financial service

companies, and the implementation of national treatments for foreign-

funded credit investigation companies.

Non-discriminatory prudential supervision over

domestic and foreign investments

Yi noted that, at present, the PBOC and other related government

authorities are sparing no time or effort to revise relevant laws and

regulations to ensure timely implementation of the above-mentioned

measures. In addition, in order to promote a smooth execution of relevant

work, supporting measures will be provided to strengthen financial

supervision when enlarging the opening-up measures. Chinese regulators

will conduct prudential supervision in a non-discriminatory and legally-

bound manner over all companies irrespective of their ownership, while

liberalizing both the market access and business scope permitted to

foreign capital, with an aim to effectively manage and address financial

risks, maintain financial stability, enhance the competitiveness of China's

financial sector, pursue financial globalization, and promote the opening

up of China’s broad financial market.

OutlookThese financial liberalization measures will substantially lower the

threshold of market access and send a clear signal to the

international community that China has not only the

determination but also concrete measures to fulfill its

commitment to opening up to the outside world. Moreover, these

measures will undoubtedly facilitate more diversified exchanges of

ideas and communication between the domestic and international

financial markets and promote an environment of learning from

each other’s strengths and removing weaknesses, so as to achieve

mutual benefits by further enhancing the global competitiveness

of China's financial sector while providing overseas investors with

more channels and opportunities to access the Chinese market.

We will continue to pay attention to the implementation rules of

these opening-up measures that are expected to be announced

subsequently this year, and share our insights on their impacts on

foreign financial institutions.


26

4. Operating capital allocated by a foreign bank to its branches

operating in China is calculated on a consolidated basis. When

establishing an additional branch, the foreign bank may authorize

its branches in China to allocate the operating capital to this new

branch in accordance with regulations, provided that the

aggregate operating capital exceeds the regulatory minimum.

5. Wholly foreign-owned banks, Sino-foreign joint-stock banks and

branches of foreign-funded banks shall strengthen their business

policy improvement, system development, compliance

management and risk control to enhance their overall financial

service capacity to conduct the above-mentioned businesses. The

managing branch of a foreign bank shall enhance its

administration over other branches operating in China and report

significant matters to the regulatory authorities.

Our viewThe major changes in the Notice can be summarized into two

aspects:

Permission for the branches of foreign-funded banks, wholly

foreign-owned banks and Sino-foreign joint-stock banks to

engage in distribution and redemption (as agent) and

underwriting of government bonds in accordance with rules and

regulations;

► Permission for the managing branch of an eligible foreign-

funded bank to authorize its branches operating in China to

engage in RMB business and transact in financial derivatives;

regulatory measurement of operating capital on a

consolidated basis across all branches in China of a foreign

bank, and permission for foreign banks to authorize the re-

allocation of their operating capital held in branches in China

to a newly-established branch in accordance with rules and

regulations.

The above-mentioned changes reflect CBIRC’s two key objectives

of expanding the business scope of foreign-funded institutions

and improving regulation over them. These policy updates have

not only broadened the scope of bond-related business permitted

to foreign banks in China, but also enhanced the decision-making

power of their China-based managing branches to a large extent.

For foreign banks with multiple domestic branches planning to

engage in RMB business or transact in financial derivatives, the

administrative licensing procedures will be simplified significantly,

thus providing new opportunities for branches of foreign banks to

engage in these businesses.

Appendix II: Notice on Further Relaxing Market Access for Foreign-Funded Banks

The “Notice on Further Relaxing Market Access for Foreign-funded

Banks” (CBIRC Office [2018] No. 16), which is addressed to foreign

banks operating in China, explicitly permits them to distribute and

redeem (in agent capacity), as well as underwrite government bonds,

allows the managing branch of a qualified foreign-funded bank to

authorize other branches in China to engage in RMB business and

transact in financial derivatives, and applies a bank-wide consolidated

approach to the calculation of operating capital for all domestic

branches of a foreign bank.

Outlined measures are as follows:

1. Branches of foreign-funded banks, wholly foreign-owned banks and

Sino-foreign joint-stock banks are permitted to distribute and

redeem (in agent capacity), as well as underwrite government

bonds without first obtaining an administrative license from the

banking regulatory authorities under the State Council, provided

that they report to the regulatory authorities within 5 working days

after such businesses are conducted.

Foreign banks shall obtain official permission from other

administrative departments (such as People‘s Bank of China),

before launching these businesses.

2. Provided that the managing branch of a foreign-funded bank with

multiple branches operating in China has been allowed to conduct

RMB business, it may extend its management responsibility to

authorize its branches to engage in RMB business.

A branch contemplating RMB business shall complete the

preparatory work associated with the RMB business operation in

accordance with the rules and regulations and report to its local

banking regulator before starting the business.

3. Provided that the managing branch of a foreign-funded bank with

multiple branches operating in China has been allowed to transact

in financial derivatives, it may extend its management responsibility

to authorize its branches to trade in derivatives.

A branch contemplating financial derivative transactions shall

satisfy the regulatory requirements on such business, report to the

local banking regulator, and submit relevant materials beforehand.


27

The “Notice on Expanding the Business Scope of Foreign-funded

Insurance Brokerage Companies” (CBIRC [2018] No. 19) is addressed

to foreign insurance brokers and aims to further open up China’s

insurance industry to the outside world and promote development of

the industry.

Specific measures are as follows:

1. Foreign-funded insurance brokers holding an insurance brokerage

license approved by the insurance regulatory authority under the

State Council may conduct the following businesses in China:

(i) developing insurance schemes for policyholders, selecting

insurers and processing insurance coverage

(ii) assisting the insured or the beneficiary to process claims;

(iii) conducting reinsurance brokerage

(iv) providing clients with advisory services such as disaster

prevention, loss prevention or risk assessment, and risk

management

(v) conducting other businesses approved by the CBIRC

2. The Notice is implemented from the date of promulgation. In case

of any discrepancy between the relevant contents of the “Notice on

Issuing the Rules for the Insurance Business Prescribed in China’s

Accession to WTO Legal Documents” and this Notice, the latter

shall prevail.

3. Eligible foreign-funded insurance brokerage companies may

complete application procedures for changing the insurance

brokerage business license at their local insurance regulator offices.

Appendix III: Notice on Expanding the Business Scope of Foreign-funded Insurance Brokerage Companies

Our view:Although the “Rules and Regulations for Insurance Brokerage

Institutions” stipulates that insurance brokerage companies can

engage in the above-mentioned businesses, the “Notice on Issuing

the Rules for the Insurance Business Prescribed in China’s

Accession to WTO Legal Documents” (CIRC Office [2002] No. 14)

limits the scope of business of foreign-funded ones, which are

permitted by the insurance regulatory authority to engage in large

cross-border commercial insurance brokerage, international

shipping, aviation and transportation insurance brokerage, and

reinsurance brokerage business. Therefore, foreign insurance

brokerage companies were not allowed to engage in small and

medium commercial insurance brokerage business or personal

insurance brokerage business until the issuance of this CBIRC

[2018] No. 19 Notice.

The expansion of the business scope will help foreign-funded

insurance brokerage companies apply their extensive brokerage

and risk management experiences gained from previously

permitted businesses into the services for personal and small

enterprise clients. With these new policies in place, foreign-funded

insurance brokerage companies are expected to identify new

opportunities for business growth and expansion. Moreover, it will

help China’s small and medium-sized enterprises and personal

clients gain better insurance service and experience and improve

the service capacity and efficiency of the Chinese insurance

brokerage industry.


28

In accordance with the financial liberalization measures announced by Yi Gang at the Boao Forum for Asia and the subsequent implementation

measures in specific industries published by the CBIRC and the Chinese Securities Regulatory Commission (CSRC), the timetable for China’s

financial opening-up is summarized as below:

By 30 April 2018 By 30 June 2018 By 31 December 2018 By 2021

Foreign-funded

banks

Branches and subsidiaries cannot

exist simultaneously

Removing restrictions on

the establishment of

branches and subsidiaries

Allowed to operate partial foreign

exchange & RMB business

Encouraging the influx of

foreign capital into banking

industry areas including

trust business, financial

leasing and consumer

finance etc.

Securities

companies, fund

management

companies, futures

companies & life

insurance

companies

► For domestic banks and

financial asset management

companies, the proportion of

shares held by a single

offshore investor and its

affiliates controlled or jointly

controlled shall not exceed

20%; The proportion of shares

held by all foreign investors

and their affiliates controlled

or jointly controlled shall not

exceed 25%

► The foreign shareholding

proportion in life insurance

companies shall not exceed

50%

► Securities companies, fund

management companies and

futures companies shall be

controlled by domestic capital

Relaxing caps on the foreign

shareholding proportion to

51%

Phasing out restrictions

completely

Banks & financial

asset management

companies

Removing caps on the


proportion

Financial asset

investment

companies & wealth

management

companies newly

established by

commercial banks

Removing caps on the


proportion

Insurance

brokerage

companies

► The foreign shareholding

proportion is limited to 51%

► The minimum requirement on

the year-end total assets is

USD 200 million

► The business scope is

restricted

Applying identical business

scope for domestic and

foreign-funded companies.

The restrictions on the

establishment requirements

and shareholding

proportion remain

Insurance

companies

The establishment requirements

include:

(1) The company has operated

insurance business for over 30

years

(2) The company has established a

representative office in China

for 2 years

(3) The year-end total assets of 1

year prior to the application

for establishment shall exceed

USD 5 billion

Abolishing the requirement

of a 2-year representative

office presence prior to the

establishment of a foreign

insurance company

Securities

companies

► Foreign-controlled joint

venture securities companies

are not allowed

► The shareholding of domestic

securities companies must be

involved in a joint venture

securities company

► The scope of business is

limited

► Allowing foreign

investors to gain

control of joint venture

securities companies

► Removing the

requirement for foreign

investors to seek a

domestic securities firm

counterpart to establish

a joint venture

securities company

Lifting restrictions on

business scope

Appendix IV: Summary of the Financial Opening-up timetable


29

List of joint-venture fund management companies (as of July 2018)

No. Name Date of Establishment Foreign ShareholderForeign

Shareholding Ratio

1 Hang Seng Qianhai Fund 1 July 2016 Hang Seng Bank Limited 70%

2 CR Yuanta Fund 17 Jan 2017 Yuanta Securities Investment Trust Co., Ltd. 49%

3 Golden Trust Sinopac Fund 2 Jan 2014 SinoPac Securities Investment Trust Co., Ltd. 49%

4 CITIC Prudential Fund 30 Sep 2005 Prudential Group 49%

5 Penghua Fund 22 Dec 1998 Eurizon Capital SGR S.p.A 49%

6 UBS SDIC Fund 13 Jun 2002 UBS AG 49%

7 China International Fund 12 May 2004 J.P. Morgan Asset Management (UK) Limited 49%

8 Invesco Great Wall Fund 12 Jun 2003 Invesco Ltd. 49%

9 Hwabao WP Fund 7 Mar 2003 Warburg Pincus Asset Management, L.P. 49%

10 Franklin Templeton Sealand Fund 15 Nov 2004 Franklin Templeton Investments 49%

11 HSBC Jintrust Fund 16 Nov 2005 HSBC Global Asset Management (UK) Limited 49%

12 Manulife Teda Fund 6 Jun 2002 Manulife Asset Management (Hong Kong) Limited 49%

13 Aegon-Industrial Fund 30 Sep 2003 AEGON International B.V. 49%

14 HFT Fund 18 Apr 2003 BNPP IP BE Holding 49%

15 CPIC Fund 3 Apr 2003 Allianz Group 49%

16 Huatai-PineBridge Fund 18 Nov 2004 PineBridge Investment LLC 49%

17 First State Cinda Fund 5 Jun 2006 Colonial First State Group Ltd. 46%

18 Everbright Pramerica Fund 22 Apr 2004 Pramerica Investment Management 45%

19 ICBC Credit Suisse Fund 21 Jun 2005 Credit Suisse AG 45%

20 Rongtong Fund 22 May 2001 Nikko Asset Management Co., Ltd. 40%

21 AXA SPDB Asset Management 5 Aug 2007 AXA Investment Managers 39%

22 Morgan Stanley Huaxin Fund 14 Mar 2003 Morgan Stanley International Holdings Inc. 37.36%

23 ABC-CA Fund 18 Mar 2008 Cré dit Agricole Asset Management Limited 33.33%

24 CDBS Cathy Fund 16 Jul 2013 Cathay Securities Investment Trust Co., Ltd. 33.3%

25 Founder Fubon Asset Management 8 Jul 2011 Fubon Asset Management Co., Ltd 33.3%

26 Changsheng Fund 26 Mar 1999 DBS Bank Ltd. 33%

27 SWS MU Fund 15 Jan 2004 SWS MU Fund Management Co., Ltd. 33%

28 Guotai Asset Management 27 Mar 2013 Bank of Nova Scotia 33%

29 Guotai Asset Management 5 Mar 1998 Assicurazioni Generali S.P.A 30%

30 BOCOM Schroders Fund 4 Aug 2005 Schroder Investment Management Limited 30%

*Sources: Website of Asset Management Association of China/National Enterprise Credit Information Publicity System/Annual reports

Appendix V: List of joint-venture fund management companies


30

No. NameDate of

EstablishmentForeign Shareholder

Foreign

Sharehold

ing Ratio

31 Minsheng Royal Fund 3 Nov 2008 Royal Bank of Canada 30%

32 Harvest Fund 25 Mar 1999 Deutsche Asset Management (Asia) Co., Ltd. 30%

33 Maxwealth Fund 7 Nov 2013 AMP Capital Investors Limited 28.51%

34 Fullgoal Fund 13 Apr 1999 BMO 27.78%

35 Lombarda China Fund 19 Jul 2006 Unione di Banche Italiane S.p.A 25%

36 Mirae Asset Management 20 Jun 2012 Mirae Asset Global Investments Co., Ltd. 25%

37 CCB Principal Asset Management 19 Sep 2005 Principal Financial Services, Inc. 25%

38 Zhonghai Fund 18 Mar 2004 La Compagnie Financiè re Edmond de Rothschild Banque 25%

39 Pingan-UOB Fund 7 Jan 2011 UOB Asset Management Ltd. 25%

40 China Post & Capital Fund 8 May 2006 Sumitomo Mitsui Banking Corporation 24%

41 Bank of China Investment Management 12 Aug 2004 BlackRock Investment Management (UK) Ltd. 16.5%

42 China Life AMP Asset Management 29 Oct 2013 AMP Capital Investors Limited 14.97%

43 China Asset Management 9 Apr 1998 Power Corporation of Canada Mackenzie Investments Limited13.9%13.9%

*Source: Asset Management Association of China website, National Enterprise Credit Information Publicity System, Annual reports

List of joint-venture fund management companies (as of July 2018) (continued)

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